Out of Control Policy Blog

No Bailout for Detroit, Obama Puts Bankruptcy on the Table

Congressional leaders didn't even vote on an auto bailout this week, in what is, at least temporarily, a victory for free market proponents. After what limited support there was for a Big Three bailout was sucked away by the dismal testimonies of Ford, GM, and Chrysler's CEOs--for future reference don't fly three multi-million dollar private jets to a hearing where you plan to beg for money to help you make more cars--Democratic leaders in the House and Senate decided any vote was doomed.

Instead of voting, Congress put off the issue until at least December and demanded the Big Three come back to them with a detailed plan proving that $25 billion would rescue them from their current plight. In a press conference yesterday House Speaker Nancy Pelosi said, "Until they show us the plan, we cannot show them the money." According to the AP, she also stressed that whatever the Big Three provided to Congress, it must show they had a plan for "viability and accountability," meaning that the were transforming their industry in a way that it would become competitive, and that they were clear about how the federal loan money was used.

It is somewhat unbelievable that the CEOs of these major companies would ask for cash without knowing how they were going to use it. Although such an oversight could be seen as indicative of how they've managed the Big Three over the past several years... poorly.

Senate Majority Leader Harry Reid and Pelosi said Detroit's automakers must submit their plan to lawmakers by Dec. 2. If this happens it is likely that the lame duck Congress will come back to DC to debate a legislative decision. But whether or not the companies can conjure up some economic statistics showing how $25 billion will keep them solvent will not negate the many reasons why Congress should not bailout the Big Three:

  1. Taxpayer money should not be redistributed to cover the administrative mistakes of Detroit's Big Three, no matter what the potential job loss could be;
  2. At a time when we've already spent over $4 trillion in 10 months in bailout and loan measures, we shouldn't be continuing to increase the national debt;
  3. The theory of creative destruction informs us that the bankruptcy of one or more of the Big Three will not destroy the auto industry, but simply transform it into something better down the road;
  4. The bankruptcy of the auto industry will not end these car companies, nor cause every auto worker to lose their jobs, it simply will reduce the size of the firms as they clear their debts, reset their management, develop new visions, and retool for the 21st Century (which they should have done a long time ago);
  5. There are other policy solutions available, such as cutting taxes, that could be coupled with financial decisions, like cutting health benefits or paying the salaries of fired employees (the unions could also lower demands on their wage levels).

Congress should be commended for demanding a detailed plan before issuing $25 billion. And if they do hand out that cash they should measure and monitor the money to make sure it is used as promised (unlike the Treasury with its $700 billion bailout cash). Ultimately though, an auto bailout remains a bad idea if Detroit and the car companies want to foster long-term growth as opposed to maintaining the status quo.

In a new turn of events, Bloomberg News reported this morning that the Obama transition administration is considering a recommendation of bankruptcy. They are discussing with lawyers a so-called "prepackaged" bankruptcy, that essentially boils down to a fast track bankruptcy. Under this proposal, the Big Three could be out of bankruptcy within a year, as opposed to traditional Chapter 11 which could take as many as five years.

The Big Three have already considered this and rejected it, according to the Bloomberg story, though that is understandable. Ford, Chrysler, and GM would want to avoid bankruptcy at all costs because it will hurt their brand images and they worry many consumers may be unlikely to want to buy a car from a company in bankruptcy for fear that there would be no sustainable warranty. Going into bankruptcy is also almost assuredly a pride issue for them.

Still, bankruptcy--prepackaged or otherwise--is the appropriate free market step. This is the consequence of poor management. This is the consequence of poor PR. This is the consequence of competition. This is the consequence of not being willing to move with the times fast enough. This is the consequence of complacence. And this is ultimately just a part of industrial evolution.

See my recent commentary on why Congress Shouldn't Bailout the Big Three.

Anthony Randazzo is Director of Economic Research


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